Prior to the current economic situation, property developers could typically expect bank funding of up to 80% - 85% of the cost of development. Currently, and for the foreseeable future, it is expected that developers can only expect to fund circa 60% - 65% of the costs of the development from senior debt providers. This will require either more input from the developer or additional finance from another source to fill the gap.
This type of funding is known as ‘mezzanine funding’.
Where a developer has sufficient cash to fund a scheme solely with senior debt, mezzanine finance can still prove advantageous. By using smaller amounts of working capital on each project, coupled with mezzanine funding, the developer can generate higher profits from their equity. If the use of mezzanine finance allows a developer to develop three projects instead of one, profits can be increased dramatically and also reduce risk should one of the three get delayed or encounter problems.
When we prepare a funding solution for a Client, we would firstly establish the level of funding available from a primary lender, alongside the developer’s contribution, and assess what the mezzanine requirements are.
For strong proposals, we can obtain funding up to 90% of the cost. These schemes need to produce a return on cost greater than 25%. Please review the Case Studies for specific examples.